The Awful Truth About Living Expenses

living expensesIt is human to make mistakes. Unfortunately, if those mistakes are made on the living expense calculations that are considered in the terms of the divorce agreement, you can forget about financial stability. If you don’t want to compromise your money situation for years to come, here are 5 common mistakes to avoid.

Mistake # 1: Using rough estimates.

I will say this directly and plainly: using expense “estimates” for the divorce agreement is stupid. No matter how familiar you are with your family’s bills and financial needs, don’t trust your memory on this. Begin with bank and credit card statements over the past 3-6 months, categorize all expenses, and be sure to include cash outflows that happen infrequently (such as life insurance premiums paid quarterly or maintenance on your car).

Mistake # 2: Leaving out entire expense categories.

A related mistake is forgetting to include certain categories of expenses – whether because they seem immaterial, or because you are overly focused elsewhere. For example, I had a client who “estimated” a budget for herself and her teenaged daughter and completely left out clothing expenses. In retrospect, it happened because she was worried about her medical expenses. All of her energy and effort went into detailing prescriptions and copays, and she overlooked the need to buy shoes and clothes. If you want to avoid this mistake, use actual expenses and don’t leave out anything, no matter how trivial. Small expenses do add up!

Mistake # 3: Ignoring long-term consequences of property division.

The emotional appeal of keeping the family home has a way of getting smart people to wear rosy glasses. Monthly maintenance expenses, property taxes, and the likelihood of having to replace the roof in 5-7 years – none of those seem to matter in the heat of the moment, but they can effectively take away your hope for financial stability.  I know that keeping an emotional distance during property division is difficult. My advice is to listen to your financial planner, look carefully at cash flow projections, and keep an open mind.

Mistake # 4: Forgetting about taxes.

Husband and Wife may disagree on a variety of issues, but when it comes to divorce settlement, the IRS is their common enemy. I cannot over-emphasize that every single decision in a divorce must be viewed through the tax lens. Certain choices, like splitting investment accounts 50/50, might look like a good idea initially – but you don’t know whether an offer is a good deal until you have determined the tax impact of what you intend to do with the portfolio as well as the tax basis of the investments. Although fees and other costs are not the same as taxes, you also want to educate yourself on what, if any, of those you will incur related to the portfolio.

Mistake # 5: Leaving out inflation.

Inflation has a way of creeping in slowly. It may not make much of a difference for your projected expenses a year from today – but it matters a whole lot when you are planning for your children’s education expenses 10-15 years from now. The same idea applies when you are planning for retirement. Be sure to include inflation into your expense projections, so that you are prepared for the true costs when they happen.

The awful truth about living expenses

A key take-away for my clients (and anyone who is going through a divorce) is that every settlement offer and scenario must get a complete evaluation.  Sometimes, that means looking at projections of 3-5 (or even more) years into the future. You should consider incomes, assets, living expenses adjusted for inflation, taxes, retirement plan contributions, medical expenses, health insurance, and education expenses – and each of those components should be as accurate as possible.

If that sounds complex and technical, you are right – it is. That’s why I encourage my clients to work with a financial planner who has experience handling property division in a divorce. An agreement grounded in reality, combined with sound budgeting and financial planning, can make a difference in finding financial stability in the years after the divorce.


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